Dollar falls as Fed stays aggressive; euro climbs

Further upside seen in store for shared currency in the short run

WilliamL. Watts

LOS ANGELES (MarketWatch) — The U.S. dollar fell Wednesday, weighed by a report of shrinking activity in the world’s largest economy as the U.S. Federal Reserve said it will maintain its aggressive easing stance.

Meanwhile, the euro reclaimed the $1.35 handle and pressed to its highest level versus the dollar since November 2011.

The ICE dollar index
DXY, -0.24%
, which measures the greenback against a basket of six other major currencies, traded at 79.302 compared with 79.527 in North America trade late Tuesday.

The index fell to 79.18, according to FactSet data, after the Fed said it will keep buying $85 billion a month in mortgage bonds and Treasurys because of downside risks to the economic outlook. Read more about the Fed's policy statement.

Ahead of the Fed announcement, market participants had been re-reading minutes from the central bank’s meeting in December that had suggested some policy makers “were less comfortable with the new [quantitative easing] program, that some of them wanted to end it early,” said Robert Lynch, a currency strategist at HSBC said in a telephone interview.

At the December meeting, the Fed bolstered its quantitative-easing program by adding $45 billion of monthly Treasury purchases.

But Wednesday’s announcement solidifies that “we’re going to get more QE by the Fed,” as it “doesn’t contain the hesitancy toward more QE that was evident in the minutes,” said Lynch.

Some follow-up on the notion that QE might end sooner than anticipated may have provided some support for the dollar against the euro, “but this statement doesn’t provide the basis for that,” he said.

The WSJ Dollar Index
BUXX, -0.19%
which uses a slightly larger comparison basket, also fell, to 70.66 from 70.80 late Tuesday.

The dollar turned lower earlier Wednesday after the U.S. Commerce Department reported that gross domestic product contracted by a 0.1% annual rate, down from 3.1% growth in the third quarter.

Kit Juckes, head of foreign exchange at Société Générale, wrote ahead of the U.S. GDP report that a “soft” reading on growth in goods and services would have the effect of sending the euro higher on the dollar. The strength of recent quarterly earnings by U.S. companies has helped propel the S&P 500 Index
SPX, -1.33%
to new highs despite worrisome technical indicators and has contributed to a global risk rally, Juckes wrote in a note.

Currencies that typically benefit from rising risk appetite — such as the Canadian, Australian and New Zealand dollars as well as the South Korean won and the Mexican peso — have failed to benefit due to expectations their previous rallies will prompt policy makers to at least slow them down, Juckes said. “The exception, at least for now, is the euro,” he said. “The ECB is doing nothing to talk down the currency and everything necessary to send it higher.”

Among other major currency pairs Wednesday, the dollar
USDJPY, -0.11%
bought 91.13 yen, up from ¥90.71. The greenback continues to explore upside territory last seen in mid-2010 as the yen continues a sharp slide.

The British pound
GBPUSD, +0.6454%
changed hands at $1.580 compared with $1.5761, while the Australian dollar
AUDUSD, +0.0650%
fetched $1.0407, down from $1.0472.

‘Unstoppable’ euro

The euro
EURUSD, +0.3255%
on Wednesday climbed to trade at levels against the greenback not seen in 14 months. In recent action, it was at $1.3568, up from $1.3490 in North American trade late Tuesday.

The shared currency “seems unstoppable right now, boosted by euro repatriation, month-end flows, and the fact that the [European Central Bank’s] balance sheet is shrinking (at least for now),” wrote strategists at FxPro in London. “Higher levels appear in prospect against most major currencies in the short term.”

The euro also gained at the expense of a broadly weaker Japanese yen, pushing to its highest level since April 2010.

The European Central Bank’s balance sheet will contract as banks begin early repayment this week of some of the three-year loans provided by the December long-term refinancing operation. See: Europe banks begin repaying LTRO cash.

Meanwhile, remarks by an ECB policy maker showed no alarm over the euro’s rise.

Ewald Nowotny, the chief of Austria’s central bank, told reporters that the shared currency “remains within a normal long-term range,” attributing its rise to an improved economic outlook and the ECB’s stabilization measures. See ECB's Nowotny: Euro in normal long-term range.

On the fundamentals, the euro shrugged off data showing Spain’s fourth-quarter GDP fell by a larger-than-expected 0.7%.

Bulls also paid little heed to the European Central Bank’s latest lending survey, which found that euro-zone banks expect credit to remain tight despite continued improvement in their access to funding in the first quarter of 2013. See: Euro-zone banks say credit to remain tight: ECB.

Meanwhile, the European Commission’s economic-sentiment indicator for the euro zone continued to rise, hitting a seven-month high in January.

Varahabhotla Phani Kumar, a reporter in MarketWatch’s Hong Kong bureau, contributed to this report. Follow him on Twitter @MktwKumar.

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